The decision to enroll in Medicare Part B, while maintaining your Federal Employee Health Benefits (FEHB) in retirement, is one of the most difficult choices a new retiree faces. About 70% of federal retirees select to enroll Medicare B, but that percentage has been declining.

Let’s take a high level look at how FEHB and Medicare interact so you can decide if enrolling in Medicare Part B is the right decision for your situation.

What is Medicare?

Medicare is federal health insurance. Original Medicare consisted of Part A and Part B. It was created in 1965 to cover people age 65 and older, regardless of income or medical history.

In 1972, eligibility was expanded to include people under 65 receiving social security disability benefits for 24 months and those with end stage renal disease, which is also called kidney disease. Medicare Part C was added in 1997 and Part D went into effect in 2006.

Medicare Part A

Part A is known as hospital Insurance. Nursing care, prescription drugs, room and board etc., at the hospital is covered in Part A. It also covers skilled nursing facility care, nursing home care, hospice, and home health services.

It is premium free for most people since funding comes from payroll taxes. You or your spouse must have worked 10 years and paid Medicare taxes. Federal employees before January of 1983 receive credit for Medicare taxes. Employees pay 1.45% of their income while working and that is matched by the employer. Single individuals that make over $200,000 and married couples making over $250,000 pay an additional 0.9% above that threshold.

Why would someone sign up for Medicare Part A?

Many are surprised that there are some services not covered by FEHB. Rehab care at hospital for example from a fall or a knee/hip replacement surgery rehab after a hospital stay are not covered by FEHB, but is covered under Part A; it pays for skilled nursing facility care at 100% for the first 20 days. FEHB supplements only kick in and pay for Medicare copayments for days 21-100. In this case, failure to enroll in Part A can amount to tens of thousands of dollars in charges.

If you combine Part A and FEHB, deductibles are paid for during hospital stays. This results in virtually no out of pocket expenses.

Why would someone not enroll in Medicare Part A?

If you participate in a Health Savings Account (HSA), your ability to contribute pre-tax dollars goes away. This is because you are not allowed to have any other insurance besides a high deductible health plan and take part in an HSA. You would have to weigh the economics of continuing the tax savings of an HSA compared to the potential hospital bills. You could continue participating in a Flexible Spending Account if you are still working.

Most Federal Employees sign up for Part A since it is a benefit they have earned during their careers. Enrollment is as soon as three months prior to your birthday month when you turn 65. However, you can enroll at any time after that with no penalty.

Medicare Part B

Medicare Part B is also known as doctor’s insurance. It covers costs for doctors’ visits, physical therapy outside the hospital, durable medical equipment, vaccinations etc. It is paid for by a premium billed to people that enroll in Part B, and the government covers the remaining portion through general revenues. The premium is charged on a sliding scale based on your income.

Medicare Part B Premiums Based on Income

If your yearly income in 2015 (calculated in 2016, for payment in 2017) was

You pay each month (in 2017)

File Individual Tax Return

File Joint Tax Return

File Married & Separate Tax Return

$85,000 or less

$170,000 or less

$85,000 or less

$134

above $85,000 up to $107,000

above $170,000 up to $214,000

Not applicable

$187.50

above $107,000 up to $160,000

above $214,000 up to $320,000

Not applicable

$267.90

above $160,000 up to $214,000

above $320,000 up to $428,000

above $85,000 and up to $129,000

$348.30

above $214,000

above $428,000

above $129,000

$428.60

The initial enrollment period is three months prior to your birthday month and up to three months after your birthday month if you are retired. If you are still working, you get 8 months to enroll after you retire without penalty.

Why would someone sign up for Medicare Part B?

More services and no or few copayments/deductibles. Medicare Part B pays 100% for someone to go to your home and provide home health care. Skilled services like occupational therapy, speech language pathologist etc., are covered. FEHB does not pay for this. FEHB is secondary insurance and will help only with payments if Part B is the primary. Home health care is very limited under FEHB. FEHB will provide prescription drug benefits if you have Medicare Plans A and B.

You are locking in maximum out of pocket expenses with the monthly premiums for Medicare Part B. At $134 per month, or about $1600 per year. This is insurance, so if you enroll and use it, then it is worth its weight in gold. If you don’t, then it is just wasted money. You are hedging your bets with insurance.

You want to avoid the penalties of declining to enroll in Part B as soon as you retire or turn 65, whichever comes later. The penalties are steep and they are permanent. The penalty is 10 per year when you decline to enroll. So if you declined to enroll in 2016, you would be paying 10% above your rate in 2017. Instead of $134, you would pay $147 per month. Or about a $160 penalty for the year. This 10% penalty follows you every year.

Political uncertainty. It is unknown how long FEHB plans will remain a strong health insurance. Federal employees may find no choice but to migrate to Medicare Plan B and they may be asked to pay the penalty if they declined enrollment when first eligible.

Medicare is portable across the country. FEHB may not be, depending on your plan.

Why would someone not sign up for Medicare Part B?

If you are still working, it does not make sense to sign up for Part B. Medicare in this case will be a secondary payer and won’t offer much in payback for the $1600 in yearly premiums. You can sign up when you retire, penalty free.

You figure you are healthy and want to wait until you are showing signs of being chronically ill so you wait as long as possible in order to save the $1600 a year. You are willing to pay the 10% yearly penalty once you sign up. Be aware that late enrollment is open January 1 through March 31 every year but the insurance won’t kick in until July 1st. So you will have to be able to predict when you will be ill.

FEHB has a maximum out of pocket protection. You don’t want to spend a guaranteed $1600 (in 2017) in order to possibly save $3900 (if maximum FEHB out of pocket is $5500). One thing to keep in mind is that FEHB’s maximum out of pocket protection only applies to preferred providers and does not include prescription drugs.

An individual’s income is higher than $85,000 ($170,000 as a couple) so the Part B premium is more than the standard $134 per month premium. The cost, risk and benefit of enrolling or not enrolling needs to be looked at.

Medicare Part C & D

Medicare Part C is also known as Medicare Advantage. It is very similar to FEHB in that it is offered by private companies, many of which also have FEHB plans. They manage your Medicare benefits for you.

Some charge an additional fee above what Part B costs but some do not. You do get some extra services covered like drug coverage, although there may restrictions on getting care (referrals required to see specialists for example).

There is a maximum out of pocket cost you would be responsible for which is appealing. A negative is some plans may not cover you nationwide like Medicare does. Most federal retirees that have FEHB do not elect Part C coverage.

Medicare Part D is prescription coverage. Most federal retirees that have FEHB do not elect Part D coverage. FEHB prescription coverage is usually at least equal to Medicare Part D.

Medicare Enrollment

If you are working past your 65th birthday, fill out form CMS-L564 (available online) to provide employment information so you are eligible for Medicare.

You can notify the Social Security Administration of changes to your income that were not reflected in your IRS tax returns. This is to your benefit so that you are charged the appropriate Medicare Part B premium. Please keep in mind that proceeds from the sale of houses will impact your income as will TSP distributions.

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. Carefully consider your investment objectives, risk factors before investing. Investing involves risk, including the possible loss of principal. Diversification and asset allocation may not protect against market risk. Nothing in this article is intended as legal or tax advice. Please consult with your independent legal or tax advisor to seek advice based on your particular circumstances. For a list of states in which I am registered to do business, you can visit www.adviserinfo.sec.gov and search for my name.

About the Author

Alexis Hongamen founded FederalRetirementAdvice.com to exclusively help civil servants with their financial planning & investment needs. As a 25 year federal employee & a Chartered Retirement Planning Counselor, he writes about financial matters of concern to gov. employees & retirees. He can be reached at (407) 900-1653.